Spain: The Clouds Are Parting

That warm, sunny glow you notice in Spain these days isn't just the climate, it's the blush of an economic recovery. The data in recent weeks confirm that the upturn is broadening, and inflation, while still stubbornly high, is at least stable.

Real gross domestic product picked up momentum in the second quarter, growing an estimated 1% from a year ago, says the Bank of Spain (chart). Exports are powering the upturn, reflecting the peseta's sharp devaluation since 1992. Led by tourism, exports in the first half rose 35% from a year ago, and the current account deficit shrank 33%. The 1994 current account may wind up in the black for the first time since 1986. Spain expects a record 46 million visitors this year--6 million more than its population.

And now, with labor markets improving, consumer spending is warming up. For example, July sales of new cars were up 16.6% from a year ago. Registered unemployment in July posted the largest decrease since 1986, the fifth dip in a row. Increased tourism fueled the improvement, but the industrial and construction sectors posted declines as well.

So why are Spain's stock and bond markets in a nosedive? Inflation worries are one reason. The weaker peseta pushed up prices paid by manufacturers in June by 4.3% from a year ago, the largest jump in almost five years. But amid weak domestic demand, producers cannot pass along those higher costs. Consumer prices in July rose 4.8% from a year ago, and excluding food and energy, the core rate of inflation has fallen from more than 6% a year ago to 4.3% in July.

Despite surging food prices, inflation should remain under control. Spain still has the highest jobless rate in Europe, at 24.3% in the second quarter. And labor-market reforms, which make it easier to hire and fire, have cut labor costs, allowing wage growth to moderate. Recent wage settlements in the private and public sectors averaged less than 3%.

Another worry is that the minority government of Prime Minister Felipe Gonzlez will not cut the country's budget deficit. The problem is spending, where 1994 outlays for health care, jobless benefits, and other transfers are overshooting their targets. Still, chances are good that the 1995 budget, due in late September, will meet the European Union's deficit goal of 5.9% of GDP.

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